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Published in Nonprofits
Downtown Kalamazoo. Downtown Kalamazoo. COURTESY PHOTO

Kalamazoo Foundation for Excellence endowment confronts inflation, stimulus funding

BY Thursday, October 20, 2022 03:26pm

KALAMAZOO — The Kalamazoo Foundation for Excellence plans to cut spending on annual “aspirational” projects by more than half in 2023 to protect the endowment from economic headwinds and allow the city’s federal stimulus funding to potentially fill in gaps.

The Foundation for Excellence — a rare philanthropic entity created in 2017 to stabilize the city’s budget, provide tax relief and invest in various community services — is in the process of finalizing its 2023 budget. 

While the foundation’s endowment will balloon in the coming decade thanks to a 10-year, $400 million donation last year, a planned $3 million spending cut reflects widespread uncertainty in financial markets and high inflation as well as an influx in federal funding under the $1.9 trillion American Rescue Plan Act (ARPA). The proposed spending cut also has drawn scrutiny from some city officials who question why prior investment levels shouldn’t be maintained alongside stimulus funding.

“For the overall investment of the endowment, it’s unsurprising to say that everyone’s investment has taken a major hit in this economy,” said Foundation for Excellence Manager Steven Brown, noting that “every dollar we spend is worth less” as consumer prices rise more than 8 percent for the year. 

That has led the foundation board to significantly pull back its “aspirational” investments, one of three ways the foundation spends its funds in addition to providing direct budget stabilization to the city and tax relief by paying the difference from a previously higher tax rate and the current one set at 12 mills. The foundation’s spending plan is sent to the city in the form of a grant that is ultimately approved by the city commission.

The proposed 2023 aspirational spending — $3.87 million — is less than half of the amount the foundation spent the past three fiscal years, when it invested more than $8 million annually in projects like small business grants, youth programming, affordable housing and park enhancements. The 2023 aspirational budget calls for $1.75 million in neighborhood infrastructure spending, including new sidewalks; $825,000 for a youth employment program; $350,000 for a business development fund; and $250,000 for affordable housing. 

The spending in 2022, for example, included $1.56 million for affordable housing.

The market value of the foundation’s assets ended the second quarter this year at $160.4 million — a 13.3-percent decline from $185.1 million in the previous quarter — while the inflation-adjusted return dropped nearly 16.4 percent, according to financial data from draft minutes of an August foundation meeting.

“Certainly, there’s been a significant loss to that bottom line right now, but the health of the endowment is the health of the American economy,” Brown said. “We have every confidence it’s going to recover.”

Concerns with plan

While Brown said the Foundation’s reduction in aspirational spending doesn’t mean a drop overall because city ARPA funding could make up the difference, some city commissioners recently raised concerns with the spending plan. The city expects to receive more than $40.6 million in ARPA funding that must be spent by 2026.

City Commissioner Chris Praedel said the intent of ARPA is to allow for transformational projects in communities.

“We, Kalamazoo, have a competitive edge. If we wait and use ARPA in lieu of (the foundation), an entire childhood’s length of time would have lapsed,” Praedel said during an Oct. 17 commission meeting. “The action that I think ARPA was intended for is lost. I don’t think there’s a better time to double down our efforts, if you will.”

Brown responded to Praedel during the meeting, saying that to “double down” would “pose a threat to the endowment because the more you remove now, the less you earn. The more we have invested now, the better.”

Brown maintains that, as the fiduciary, the foundation board is responsible for appropriately managing the endowment to last in perpetuity.

“We have this tool, which was invented to be permanent, and it needs to be maintained and managed very, very prudently, even in light of people saying there are needs for it now,” Brown said in an interview. “We can’t do everything at once.”

Market swings

Jeff Williams, director of the Community Data and Research Lab at Grand Valley State University’s Dorothy A. Johnson Center for Philanthropy, is unsurprised to see the Foundation for Excellence pulling back on its aspirational investments.

“Especially with that kind of special-purpose foundation, that foundation signals to the city what to expect going forward,” Williams said. “It’s a clear signal to the city to temper or mediate expectations for revenue in the coming years. It’s as much about expectation-setting and communication as it is about a financial decision.”

More broadly, Williams noted that many foundation endowments use rolling averages — sometimes up to five years — for investments to help even out market swings and avoid steep shifts in investments from one year to the next.

“Many foundations are not doing a thing,” Williams said. “On the other hand, everyone associated with a foundation — we’re all reading the same newspaper, everyone is talking about the markets and inflation. Certainly, the market is not doing many favors this year. The big question is: Is this transitory inflation and goes another couple of quarters, or will we see this for two, three, four years? That’s a different story and affects everyone’s pocketbooks. That’s a simply unanswerable question where we’re at right now.”

Williams added that cities are now in a phase of playing “stimulus tetris,” determining how to best match new investments with funding streams like ARPA. Typical U.S. cities without a sizable endowment like Kalamazoo are balancing their traditional tax revenue streams and ARPA funding.

For Kalamazoo to add a third funding component, “it’s a tricky set of choices,” Williams said.

“I’m not surprised to hear foundations or cities changing expectations given what’s happened in the first 10 months of the year,” he said.

Cognizant of those same economic conditions, Brown said the Foundation for Excellence will take a cautious approach with its local investments in the near future.

“In the next couple of years, we have to be in a situation of an abundance of caution,” Brown said. “As with anything that’s financially prudent, sometimes it requires a little sacrifice today for the gains of tomorrow.”

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